Trump has a big, beautiful reason to push for lower rates
As the federal debt passes $37 trillion, the government’s interest expense is soaring. The President’s tax and spending bill will add to the debt.
The Federal Reserve held its policy interest rate steady this past week and maintained its median projection of two quarter-point rate cuts by year end, exactly as expected.
And nearly as predictably, President Donald Trump renewed his tirade against Fed Chair Jerome Powell for not slashing rates, adding increasingly personal insults and calling him “stupid" and “truly one of the dumbest, and most destructive, people in Government."
Such taunts have brought past rivals to heel (such as “Little Marco" Rubio, now serving as Secretary of State), but the tactic is unlikely to work with the Fed.
While nearly every president has preferred lower interest rates to bolster the economy on their watch, Trump’s motivation in pushing for lower interest rates relates to his administration’s top domestic policy priorities on taxes and spending. With the so-called One Big Beautiful Bill passed by the House of Representatives estimated to boost the nation’s debt by an additional $3 trillion, the most intractable part of the budget is the interest expense on that burgeoning debt.
In a post on Truth Social Thursday, Trump asserted that rates “should be 2.5 points lower, and save $BILLIONS on all of Biden’s Short Term Debt."
The previous administration under former Treasury Secretary Janet Yellen tilted borrowing to Treasury bills after the bond market sent the benchmark 10-year yield to close to 5% in October 2023, creating worries about absorbing the supply of intermediate- and long-term debt. This was criticized by, among others, the current Treasury secretary, Scott Bessent.
The chart here shows the sharp ascent in the federal government’s interest tab. That rise is the result of the surge in the total debt, which passed $37 trillion this past week, and the increase in short-term interest rates, from near zero percent at the beginning of the decade. The average cost of the Treasury’s overall debt has more than doubled from the low of early 2022, to 3.35% at the end of March.
Drawing on his years of experience as a heavily leveraged real estate operator, Trump said on Wednesday that he would “go very short-term...wait ’til this guy gets out, get the rates way down, and then go long-term." That presumably would be when Powell’s term as Fed Chair ends next May, at which point Trump could install his own choice to lead the central bank.
(The White House and the Treasury didn’t respond to Barron’s queries about coming changes in government borrowing plans. Treasury Deputy Secretary Michael Faulkender told Barron’s colleague Matt Peterson on Friday that the department will continue to work with the Treasury Borrowing Advisory Committee to set the best mix of maturities without specifying any changes.)
Even if the Fed under Trump’s next pick were to sharply lower its short-term rate target, there is no certainty that intermediate- and long-term Treasury yields would follow. Indeed, after the Fed cut its federal-funds target a full percentage point last year, to the current range of 4.25% to 4.5%, the benchmark 10-year yield rose more than a full point.
The president’s focus on interest rates and their role in the massive federal budget deficit has been a topic here for months. Just after November’s presidential election, this column foresaw that the president-elect would lean on the Fed to curb Uncle Sam’s mounting interest expense and the rising tide of red ink.
Trump’s badgering is having no discernible effect so far, however.
The new Summary of Economic Projections from the Federal Open Market Committee, released this past Wednesday, showed no change in the median expectation of a total of two quarter-point fed-funds rate cuts by the end of 2025. But the so-called dot plot of guesses showed that seven Fed officials were anticipating no change, with eight looking for two cuts. In the previous SEP released in March, there was a tighter consensus around two cuts by year end.
Other presidents have been notably more successful in getting the Fed on board with them. When Bill Clinton took office in 1993, he acceded to the advice of then-Fed Chair Alan Greenspan to curb the budget deficit, which Greenspan suggested would lower long-term interest rates.
Clinton privately railed that his policies were subject to the whims of a bunch of “f—ing bond traders," according to Sebastian Mallaby’s biography of Greenspan, The Man Who Knew. Still, Clinton went along, supporting the Fed’s independence along with a strong dollar, and left office with a budget surplus after the dot-com boom.
One prominent Fed governor, Christopher Waller, said on Friday that a rate cut could be on the table as early as the July 29-30 Federal Open Market Committee meeting. In a CNBC interview, Waller noted that recent inflation readings have been well contained while the Trump tariffs may be a one-time price boost, rather than indicative of sustained inflation, and that the labor market may be vulnerable to slowing. Waller, formerly the research director at the St. Louis Fed, was nominated by Trump to the Fed in 2020, and has been mentioned as a possible successor to Powell.
The Fed’s semiannual report to Congress, released on Friday, said that the job market was in “solid shape," with labor supply constrained by slower immigration and lower labor-force participation, points emphasized by Powell in his post-FOMC press conference. He will be grilled by the House Financial Services Committee on this and other topics on Tuesday, followed by testimony before the Senate Banking Committee the next day.
Congressional inquisitors surely will want to know about how the Fed will deal with White House pressures on monetary policy.
Write to Randall W. Forsyth randall.forsyth@barrons.com
topics
